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UNCLAS SECTION 01 OF 06 ISLAMABAD 000885 
 
SENSITIVE 
SIPDIS 
 
REF: ISLAMABAD 561 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EFIN EAGR EINV ENRG PREL PK
SUBJ: BI-WEEKLY REPORT ON ECONOMIC ISSUES, 22 APRIL 2009 
 
- - - - - - 
TOP STORIES 
- - - - - - 
 
¶1. (SBU) The Friends of Democratic Pakistan met in Tokyo to pledge 
USD 5.28 billion over two years to stabilize Pakistan's economy and 
to support investment in healthcare, education, and infrastructure. 
 
¶2. (SBU) The State Bank of Pakistan (SBP) lowered the discount rate 
by 100 basis points to 14 percent on April 20.  SBP Governor Raza 
cited the positive inflation outlook as the main factor behind the 
decision.  However, the Chambers of Commerce for Multan, Rawalpindi, 
Islamabad, and Tribal Areas have all deemed the cut in the discount 
rate inadequate. 
 
¶3. (SBU) According to Dr. Ashfaque Hasan Khan, former Special 
Secretary on Finance, Pakistan's GDP is forecasted to decrease USD 
4.9 billion this year.  The Nominal Gross Domestic Product is 
expected to be USD 162.6 billion in 2008-2009, down from USD 167.2 
billion last fiscal year.  Foreign investment declined by 36 percent 
during the first nine months of the fiscal year, while the output of 
the country's large-scale manufacturing declined 5.73 per cent. 
 
¶4. (SBU) Pakistan's current account deficit decreased USD 2 billion, 
approximately 21 percent, during the first nine months of the 
current fiscal year.  The decrease was mainly due to higher home 
remittances and a sharp decline in the trade deficit. 
 
- - - - - - - - - - - 
BANKING AND FINANCE 
- - - - - - - - - - - 
 
¶5. (SBU) The Securities and Exchange Commission of Pakistan (SECP) 
announced the discontinuation of the carry forward system (CFS) and 
deliverable futures products according to Business Recorder. 
Investors in the equity market were reportedly disappointed with 
SECP's decision because they expected an alternative to be 
announced, not just an end to the existing system.  (Comment:  KSE 
official Anita Mirza denied the news on April 9 and said the SECP 
decision to discontinue CFS had no impact on the market because CSF 
investment was already low.) 
 
¶6. (SBU) On April 11, The News reported that bank officials called 
off a merger between KASB Bank and Atlas Bank after they failed to 
 
ISLAMABAD 00000885  002 OF 006 
 
 
agree on a swap ratio.  However, Atlas Bank may now merge with Saudi 
Pak Commercial Bank (SPCB) instead.  The merger is subject to 
approval by the State Bank of Pakistan and other regulatory bodies. 
The SBP has been pushing for mergers and acquisitions to consolidate 
the banking industry as recent high inter-bank lending rates have 
compounded difficulties for smaller banks.  (Comment: Atlas Bank 
official confirmed on April 15 that there would be no merger with 
KASB because negotiations did not materialize and were finally 
called off.  Atlas Bank confirmed it was negotiating with SPCB 
saying that both banks are busy performing due diligence and that it 
will take at least three months to finalize the deal.) 
 
¶7. (SBU) Two of the largest Pakistani banks, Habib Bank Limited and 
Muslim Commercial Bank (MCB), expressed their interest to the 
Karachi Stock Exchange (KSE), in separate notices to acquire 
domestic operations over Royal Bank of Scotland (RBS).  The banks 
said they were applying to the State Bank of Pakistan (SBP) to start 
their due diligence of RBS Pakistan.  On April 14, Jahangir Siddiqui 
and Co. Ltd (JSCL), a Karachi-based financial services company, also 
expressed its interest in buying RBS Pakistan.  RBS, which has a 
market capitalization of approximately USD 266 million, ventured 
into the Pakistani market after acquiring global operations of ABN 
AMRO last year.  It decided to sell off its operations in 36 
countries, including Pakistan, after booking huge losses from 
sub-prime mortgages.  (Comment: Notices from both banks can be found 
on the KSE website.  JSCL Corporate Communication department 
confirmed the news, but said it is in the preliminary stages of due 
diligence.) 
 
¶8. (SBU) The SBP announced the capital requirement reduction on 
April 15 to boost the banking sector.  The bank reduced its previous 
limit of Rs 23 billion (USD 287 million) to Rs 10 billion (USD 125 
million).  According to the SBP circular, it will require banks to 
raise their minimum paid-up capital (free of losses) on a sliding 
scale, culminating in Rs 10 billion by December 31, 2013.  SBP 
stated it took this action "in view of the global slowdown in growth 
and capital accumulation by financial institutions and 
representations from shareholders."  (Comment:  Complete text of the 
circular can be found on the SBP website.) 
 
¶9. (SBU) The Karachi Stock Exchange (KSE)-100 index was up last 
week.  KSE ended April 17 at 7,794.95, 2.32 percent above its April 
10 closing.  The total share turnover was down to 259.36 million 
from 372.94 million during the prior week.  Market capitalization 
 
ISLAMABAD 00000885  003 OF 006 
 
 
rose slightly to USD 28.88 billion.  The net foreign investment 
outflow was USD 6.5 million, after a small inflow the week before. 
The banking, energy, fertilizer and cement sectors remained among 
the top performers.  (Comment:   KSE contacts told Post that the 
expectations of a substantial commitment from Friends of Pakistan 
coupled with the anticipation of interest rate cuts and the State 
Bank of Pakistan's decision to reduce minimum capital requirements 
for banks were the major factors in the market increase.) 
 
¶10. (SBU) The Lahore Stock Exchange (LSE) has been volatile, but 
still rose almost three percent over the last two weeks.  Most 
analysts attributed a string of losses April 14-17 to the Pakistan 
Muslim League-Nawaz's (PML-N) deliberations about, and ultimate 
rejection of, an offer to join the Pakistan People's Party (PPP)-led 
coalition national government. The LSE rose again April 20 on news 
of a successful Friends of Democratic Pakistan meeting. 
 
- - - - - - - - - 
ENERGY AND POWER 
- - - - - - - - - 
 
¶11. (SBU) Prime Minister Yousuf Raza Gilani inaugurated the Zorlu 
Wind Energy Project on April 19.  A Turkish company, Zorlu Enerji 
Group, established the plant at Jhimpir, Thatta, Sindh.  The first 
phase of the wind power plant will produce 6MW from 5 wind turbines 
and will meet the electricity demands of 7,400 homes.  By the end of 
2010, the wind farm will produce 300MW and the wind turbines will 
displace 10,500 tons of carbon dioxide pollution each year.  At the 
inauguration, Prime Minister Gilani said an additional 24 wind farm 
projects, with a cumulative capacity of 1,200MW, are under various 
stages of development.  (Comment:  CG Karachi and EconOff attended 
the inauguration.  During his remarks, the PM stated that 
development of alternative energy was important for Pakistan's 
energy security, reducing pollution, and decreasing dependence on 
oil imports.  He heralded the project as "green, economical, and 
indigenous" power, and a new era for Pakistan.) 
 
¶12. (SBU) Pakistani media reported on the particularly negative 
impact of load-shedding (rolling blackouts) on the textile industry. 
 The energy problems hit Faisalabad especially hard, home to roughly 
60 percent of Pakistan's textile exports, according to the 
Faisalabad Chamber of Commerce and Industry.  Sheikh Ashfaq Ahmed, 
Chairman of the Faisalabad Dry Port Trust, told the press that 
Faisalabad port business was down 40 percent over the last 5 months 
 
ISLAMABAD 00000885  004 OF 006 
 
 
due to load shedding and inconsistent gas supplies. (Comment: 
Consulate Lahore is aware of at least one U.S. company that may be 
unable to expand its plant because of inconsistent gas deliveries.) 
 
¶13. (SBU) Prime Minister Gilani officially inaugurated the 165 MW 
Attock Generation Power Plant in northern Punjab, which began 
operation in March.  The government also announced the expansion of 
the Chashma power complex which will include two new plants expected 
to generate a total of 680 MW.  (Comment:  This presumably 
represents the decision to purchase two additional Chinese-built 
reactors for Chashma initially announced at the time of Zardari's 
first official visit to China last year.  End Comment.) 
 
¶14. (SBU) Business Recorder reported that Matrix Group Consulting 
Limited (MGCL), a US-based company, will construct two power plants 
totaling USD 1 billion at Port Qasim (PQA) and Karachi Port (KPT). 
The PQA plant will run on coal while the KPT plant will use wind 
energy.  MGCL President Cathleen M. Ihasz said her company plans to 
bring more energy and infrastructure investment and development to 
Pakistan.  (Comment: KPT Public Relations Manager confirmed that two 
new plants will be built on April 14.  He said that the Matrix Group 
is in the very preliminary stages of preparing a technical report 
for these projects, and more details would emerge soon.) 
 
¶15. (SBU)  On April 15, Business Recorder reported that the Karachi 
Electric Supply Company (KESC) initiated a new "scorecard" under an 
accountability and transparency drive to combat Karachi's power 
crisis.  The strategy includes attracting millions of dollars in 
investment as well as planning several new power plants (totaling 
960MW), grid stations and feeders.  KESC will also increase system 
monitoring and work to improve transmission and distribution. 
(Comment:  KESC Director Operations announced that it will invest 
USD 361 million and noted that the city will continue to suffer 
prolonged power outages until management invests to increase power 
generation capacity, works to reduce transmission and distribution 
losses (including theft), and improves management/employee 
relations.) 
 
- - - - - - - 
AGRICULTURE 
- - - - - - - 
 
¶16. (SBU) Pakistan's rice exports increased to USD 1.55 billion 
according to Business Recorder.  Rice exports will likely reach USD 
 
ISLAMABAD 00000885  005 OF 006 
 
 
2.2 billion by the end of the current fiscal year.  Abdul Rahim 
Janoo, Chairman of the Rice Exporters Association of Pakistan 
(REAP), said new rice markets are possible as Pakistan also seeks to 
recapture traditional markets. 
 
¶17. (SBU) According to Pakistani media reports, the provincial 
Punjab government increased its target acquisition of wheat to 4 
million metric tons, up from its initial estimate of 3 million tons. 
 The bumper wheat crop may cover deficiencies in other provinces. 
The yield of wheat is also up 5-7 percent in Sindh compared to this 
time last year. 
 
¶18. (SBU) Chief Minister Shahbaz Sharif shelved the "One Rupee Roti" 
proposal, but intends to continue Two Rupee Roti scheme 
"indefinitely" according to reports in the News and Daily Times. 
Pakistani media also reported on the Chief Minister's promise to 
make the provincial Annual Development Plan (ADP) more 
"poor-friendly," enhancing Sharif's populist credentials. 
 
- - - - - 
TAXATION 
- - - - - 
 
¶19. (SBU) Shaukat Tarin, Adviser to the Prime Minister on Finance 
and Economic Affairs, spoke at the Overseas Chamber of Commerce & 
Industry (OCCI) on April 7.  During his remarks, Tarin stated that 
the Pakistani economy shows signs of improvement.  He insisted on 
the need for tax reform, and reducing the types of taxes to income 
and consumption.  Future plans to broaden the tax net may include 
adding taxes on real estate, agriculture, and capital gains.  Tarin 
also categorically ruled out any reduction in the defense budget. 
 
¶20. (SBU) Speaking at a press conference on April 9, Shabbir Ahmed, 
Chairman of the Pakistan Bedwear Exporters Association (PBEA), said 
the government may impose an 18 per cent value-added tax (VAT) on 
the textile sector next fiscal year.  The Towel Manufactures' 
Association of Pakistan (TMAP) and PBEA called the imposition of VAT 
an "anti-industry and anti-employee" move by the government.  Ahmed 
said the VAT would create cash-flow problems for the industry, and 
called on the GOP to establish a UK like tax refund system 
(exporters receives a refund as soon as the shipment reaches ports) 
or to not impose a VAT.  (Comment:  Pearl Fabric, one of the major 
stakeholders in towel exports, told post the Advisor to Finance and 
Textile Minster assured the company that the government will not 
 
ISLAMABAD 00000885  006 OF 006 
 
 
impose VAT on any of the textiles exporting categories.) 
 
PATTERSON